Tuesday, March 20, 2012

Alexander Hamilton: Legend of American Finance

It may be slightly exaggerated, but I
feel that the title I have chosen does capture the magnitude of Hamilton's
greatest accomplishment, as well as acknowledging that he was more than just
the first Treasury Secretary of Constitutional America. Hamilton possessed a
swath of gifts, talents, and interests, and he left his mark all over the
Federal government. He was a gifted orator who used his ability to persuade
people to achieve remarkable things both before, during, and after holding
public office. To be sure Hamilton possessed obvious faults. From Joseph Ellis
we learned that he was one of the most controversial figures of the time
because his policies upset many of his contemporaries such as James Madison and
Thomas Jefferson. His enemies criticized him of being a monarchist, a friend of
the rich, and even as a man who wanted to restore British control. Looking
back, Ron Chernow, casts him as a visionary who set up the workings for a
modern, capitalist society.

I have always had a fondness for
Alexander Hamilton. When I was younger he came across as far more interesting
than Jefferson or Madison. He was also different from the others in many
respects. Ellis I felt was very good in his treatment of Hamilton, but what I
felt was largely unsaid was whether or not Hamilton's policies were right. When
we discussed his fiscal policy in class I wanted to know more about what drove
him to those decisions, as well as how they affected the economy, and how
Hamilton helped shape the Federal government in general.

The
book I chose to further my knowledge of Hamilton was Alexander Hamilton by
Ron Chernow. I found Chernow to be an engaging writer who paints a very
detailed description of Hamilton from his roots on St. Croix all the way to his
death at Aaron Burr's hands. Chernow brilliantly describes his charm, wit, and
his uncompromising determination to see the new country succeed against all
odds. He starts on the island of St. Croix where Hamilton grew up. Hamilton was nominated as a delegate
for New York at the Constitutional Convention. Afterwards he teamed up with
John Jay and James Madison to craft the Federalist
papers which were a treatise for a strong central government and the role it
should play. And then he became the tireless first Treasury Secretary who put
the nation on sound credit, chartered the first national bank, and passed a
controversial tax on whiskey.

Along
the way Chernow has to debunk certain myths about him including but not limited
to; being a traitor hoping to restore the British monarchy over America, that
Washington was his puppet, and that he was using his position to reap huge
dividends for himself through bank bonds. Chernow also critiques some of the
typical stereotypes of Hamilton, chief among them was that he was just a
British tool, but also that he was a monarchist, and perhaps that he was a
womanizer. The latter, Chernow points out, is probably true, but Hamilton
likely only had an affair with one other woman, not multiple as some accused
him of having. One of the greatest benefits of reading this book was how well
Chernow describes Hamilton's attitudes about a range of things from human
nature to the role of the Federal government. He also does an excellent job of
detailing Hamilton's reasons for his actions which I found very helpful for
this paper.

The
Articles of Confederation had been the structural document of the independent
states. It permitted a very limited central government that Hamilton felt was
inadequate to solve the problems the new nation faced. From Ellis we learn that
the debt left over from the Revolution was massive, and that the Articles were
too weak to raise taxes to pay that off. Washington feared that the thirteen
states would tear the federal head clean off bringing ruin on the whole.
Hamilton had even greater fears. If there werenot a unified standing army under national control the states might turn
predatory on one another with larger states preying on smaller states. Hamilton's
fears probably would have found their deepest realization in the empires states
were creating for themselves out west. If states had competing interest in land
they might declare war on one another to get that land.

Finally,
on May 25, 1787 the Constitutional Convention began. Immediately the Virginia
Plan was put forward by Edmund Randolph. It sought to abolish the Articles of
Confederation, and form a strong central government. Soon the New Jersey plan
was put forward to challenge it. Until this point Hamilton remained silent, but
he came forward with his own plan on June 18. Hamilton wanted a chief executive
that functioned as an elected monarch appointed for life, and the same for his
vision of the Senate. The House of Representatives would be more democratic,
chosen by voters every three years. His plan largely reflected his cynicism
towards direct representation or mob rule-democracy, some in his day might have
called it.

Hamilton
had seen the effects of mob rule all too personally, and he felt that public
opinion must be steered by educated representatives. This is probably why
Hamilton felt that the wealthy and educated were best equipped to lead, and why
he was willing to upset many groups of people to make sure that the country did
not descend into the tyranny of the masses, and get the educated, wealthy people
on the new government's side. While at King's College a mob had stormed the
school to tar and feather the Tory president, Myles Cooper. Hamilton held them
off long enough for Cooper to escape by giving a speech criticizing their
actions and intent. Later another incident caused Hamilton to pick up his pen
and condemn the lawless sacking of James Rivington's print shop, the New York Gazetteer. Hamilton wrote that,
"The same state of the passions which fits the multitude, who have not a
sufficient stock of reason and knowledge to guide them, for opposition to
tyranny and oppression, very naturally leads them to a contempt and disregard
of all authority" (Chernow, 69). After the Revolution, Hamilton witnessed
another instance of mob rule which must have had struck him with fear. Shay's
Rebellion looked like civil war to Hamilton. The rebels, crushed by the heavy
Massachusetts taxes, dressed in their old revolution uniforms and shut down
courthouses. Hamilton secretly identified with these rebels because he wanted
the federal government to take on state debts left over from the war. This was
known as his Assumption Plan which was a part of his Report on Public Credit.

The
Report on Public Credit was
Hamilton's plan to restore fiscal stability to America.

But it was something more than that. It
was an attempt to secure the Federal government as the chief taxing power. It
was, in short, an attempt to make the Federal government powerful and gain the confidence
of the rich particularly those who had loaned money to the government at any
level. What is interesting about all of his policies is that they all helped
out northern wealthy merchants and bankers. This led Madison and Jefferson to
despise Hamilton's policies, which they regarded as a plot to enrich the rich. It
also presented something very close to the English system of public finance
including a national bank and a funded debt, but it also asked for the
assumption of state debt and a "Spirits tax" on whiskey and other
spirits. This report is what makes Hamilton so controversial. According to Ellis:
"These developments forced the planter class of Virginia to realize, for
the first time, that their days as America's premier political elite were
numbered, soon to be replaced by the commercial and financial elite of New York
and New England" (Ellis, 174). Since farmers tend to be debtors they have
a natural aversion to bankers and creditors.

Shay's
Rebellion, in Hamilton's view, was the result of heavy taxes levied on farmers
by the state of Massachusetts. By trying to settle its own debt the
Massachusetts government had created heavy taxes borne by farmers. Unable or
unwilling to diversify the taxes among the rest of the population, the
Massachusetts government witnessed a farmers revolt. Hamilton felt that if the
Federal government assumed the states' debt then it would distribute the tax
burden much more evenly, and not single out one group or another. The
assumption plan divided Congress, and was the most difficult part of Hamilton's
Report on Public Credit to pass,
requiring a compromise that fixed the capitol on the Potomac river in order to
get the necessary votes. The reason for the difficulty? Some states had paid
off most off their debt, and now they were going to be asked to pay for other
states' irresponsibility! However, Hamilton argued that without assumption many
states with large debt would have to raise taxes, while less indebted states
would lower taxes creating large migrations of people from high tax to low tax
states. Not only would assumption prevent this migration it would also be far
more efficient "since there would be one overarching scheme for settling
debt instead of many small, competing schemes" (Chernow, 299). Hamilton
was also doing something more subtle. Creditors have a special interest in
seeing their borrowers pay them back, therefore a kind of allegiance is formed
between creditor and debtor. If the Federal government, not the state
governments, was the one who owed money then lenders would become attached to
it, however grudgingly, in order to see that they got their money back.

This
created a number of problems. From Ellis and class we learned that some of the
bond holders were soldiers who had been paid in paper IOU's, but sold them off
to speculators. They had feared that they would not get their money back. Under
Hamilton's funding scheme the federal government would make good on all bond
payments, and hopefully bond values would soar to their original value. So who
should pocket the windfall? "The answer to this perplexing question,
Hamilton knew, would define the future character of American capital
markets" (Chernow, 298). And indeed it would. As we know, Hamilton decided
to reward the speculators who may have coerced soldiers into selling them their
bonds. In Hamilton's view the soldiers were not merely innocent victims, nor
were the speculators unmerciful predators. Hamilton felt that the soldiers had
shown little faith in the new government, and had been paid when they wanted it.
Speculators had taken a risk, and should be rewarded for that risk. This should
sound like capitalism which promotes risk taking and investing. On the other
hand this is some sort of deviation from pure capitalism, which states that
risk takers occasionally lose on their risk. Hamilton decided, grudgingly, to
protect risk takers technically at the expense of patriotic soldiers. I say
that this was technically at the expense of the soldiers because, although the
soldiers had been paid for their services (albeit not by the federal government
who had issued the bonds), they may have been duped or coerced into selling
their bonds to selfish speculators who had shorted them on the bond's true
value. And so this would evolve later into the sort of corporate welfare we see
in the gilded age, and perhaps more evincing in the mortgage-backed securities
crisis of 2008. Since Hamilton we have tended to cradle the rich which is not
something Hamilton would have wanted. "Hamilton's interest was not so much
in enriching creditors or cultivating the privileged class so much as in
insuring the government's stability and survival" (Chernow, 299). Meaning
that Hamilton did not want to protect the rich from every misfortune that might
befall them, he merely wanted them to support the new government and know that
if the government owed them money, then it would pay them back.

Another
problem created by assumption was that once news got out that the Federal
government would take on the state debt it caused one heck of a commotion among
speculators and investors. "Many rich merchants had already posted agents
to backwoods areas of the south to scoop up depreciated state debt that would
become more valuable if the federal government assumed the debt" (Chernow,
301). To Hamilton this merely showed the new confidence in the Federal
government. Interest rates were going down, and creditors were showing faith in
the new system. To others it reflected a wasteful spend of money. Away from the
presidential office on July 29 Washington sent Hamilton a list of twenty-one
complaints he had heard on his trek home. Among them was a complaint that
speculation was draining capital from productive uses and corrupting Congress.
This was to resurface later in Hamilton's term as Treasury Secretary when the
House of Representatives launched an investigation into his policies.

Having
assumed the state debt the federal government now had to find a way to pay for
it. Hamilton's tax on whiskey and other spirits would be the method. Hamilton
knew it was bound to be unpopular, but what other options did he have? He could
initiate a property tax, but that might be even more unpopular than the Whiskey
Tax as it would hit farmers particularly hard. If he was deprived of the tax at
all he would have to raise tariffs which promoted smuggling and retaliation
abroad. Again, as we know from class it was the local farmers who bore the
brunt, not the large distilleries. As a result local farmers in Pennsylvania,
for whom consumption and distillation of spirits was a way of life, rose up in
arms, tarring and feathering tax collectors.

So
could Hamilton have taxed something else, and was he right to have small
distillers bear the majority of the tax burden? Well Madison, for one thought
that no alternative existed, and even cited possible social benefits of such a
tax. Chernow doesn't give a detailed list of all other options he only states
that Hamilton knew that any alternative would be even more unpopular; farmers
would never settle for more taxes that they saw going to enrich northern
bankers. "He was boxed in, however, by the already ingrained American
aversion to taxation. Direct taxation, whether of people or houses, was
anathema to many, and, given the strength of agricultural interests and
real-estate speculators, a land tax could never have been enacted"
(Chernow, 342). Hamilton clearly saw that whiskey was his only option.

As
for the taxes fairness to all distillers, Chernow notes something quite
insightful I think. "The mostly Scotch-Irish frontiersmen of western
Pennsylvania…had the highest per-capita concentration of home-made stills in
America" (Chernow, 469). What I think this illustrates is that Hamilton is
getting the most amount of revenue possible out of this tax. Sure the bigger
distilleries might be proportionally larger, but small distilleries was where
the majority of whiskey was being made. I think Hamilton's point is to get the
debt paid off as quickly as possible without sapping too much money out of farmers
and other commoners. It is also possible that had he taxed at a flat percent
rate, that rate would have been much higher on wealthy distilleries in order to
generate the same amount of revenue. Hamilton was willing to sacrifice fairness
for a swift end to public debt which would benefit the whole population.

The
last piece of Hamilton's fiscal machine was the central bank. The bank would
create a uniform currency, increase the money supply, lend to the Federal
government and business, collect revenue and store government funds, and handle
foreign exchange. Hamilton was well aware of the evils of banking, but he felt
that the good of the bank far outweighed any negative consequences. "If
banks, in spite of every precaution, are sometime betrayed into giving a false
credit to the persons described, they more frequently enable honest and
industrious men of small or perhaps of no capital to undertake and prosecute
business with advantage to themselves and to the community" (Chernow,
348). Banks were loathed by farmers in the south where, Ellis tells us
"bankruptcy often arrived as a complete surprise on many Virginia
plantations, a product of account legerdemain that many planters took
considerable pride in not comprehending" (Ellis, 174). Essentially many farmers
were under the impression that bankers exploited them to enrich themselves.
Farmers probably did not realize exactly what taking out a loan meant for them
in the long-term. Plus farmers were at high-risk of default. If they suffered a
bad crop, an unforgiving bank might confiscate the land. Hamilton recognized
this aversion, and encouraged southerners to buy up stock in the new central
bank to distribute bank ownership; needless to say few, if any heeded his call.

Jefferson's
own Treasury Secretary educated him on the importance of the national bank.
Albert Gallatin, who had previously attacked Hamilton's use of the national
bank, said that, along with the Customs Service, it had helped to reduce
national debt. Next, Jefferson wanted Gallatin to launch an investigation into
Treasury documents to find any condemning evidence against Hamilton's policies.
Gallatin found none, and remarked to Jefferson that he had found the most
perfect system ever devised. He didn't stop there. "As for the First Bank
of the United States, once denounced by Jeffersonians as a diabolical lair,
Gallatin proclaimed that it had 'been wisely, and skillfully managed'"
(Chernow, 647). The bank, like much of Hamilton's system, was necessary for
putting the country on firm fiscal footing. The First Bank of the United States
was a forward looking move by Hamilton to create a modern fiscal machine. With
it the U.S. could regulate banking and currency. Without it, the Federal
government was either starved of cash (War of 1812), looking helplessly at
financial panic and subsequent depression (Panic of 1837), or facing the
consequences of having an unregulated currency (Black Friday, 1969).

So
what are we to make of Hamilton? Certainly the man seemed to favor wealthy,
northern bankers and merchants at the expense of the poorer farmers and
southern aristocrats. Nevertheless, Hamilton was not a tool of the wealthy. He
did not simply want to enrich bankers and merchants; he wanted to modernize
America, bring it up to speed with Europe, and create the workings of a
capitalist society that promoted risk taking. Here are two quotes which I think
explain (not excuse) Hamilton's policies: "As chief agent of a market economy,
he had to spur acquisitive impulses, accepting self-interest as the mainspring
of economic action. At the same time, he was never a mindless business booster
and knew how the desire for lucre could shade over into noxious greed"
(Chernow, 345), and from Thomas Hobbes he got "the sacredness of contracts
in transfers of securities, arguing that people entered into such transactions
voluntarily and must accept all the consequences" (Chernow, 296). What the
two quotes emphasize are that Hamilton had certain misgivings about showing
favoritism to the rich, but that it was indeed worth it because they had taken
a voluntary, calculated risk, and it was these types of people who were going
to build and characterize the American economy all the way to the modern era. I
am certain that Hamilton would be revolted at the practices of the investment
bankers who received government bailouts in 2008.

Whatever flaws or moral hazards his policies
contained he was resigned to the fact that the new nation must promote risk
takers who sometimes lost.